Hello and welcome to DEEPER LOOK.

Coming to you from New York.

I'm Del Irani, it's great to have your company.

Amid rising tensions between the US and China, the leaders of the two countries held a summit here in the US,

meeting for the first time in a year.

President Joe Biden and President Xi Jinping made progress on a number of issues,

including the resumption of a high-level dialogue between the two countries' militaries.

However, issues concerning US sanctions and export controls against Chinese companies may require further discussion.

So what does this mean for the future of economic relations between the US and China?

And what kind of strategy should the US and its allies, like Japan, deploy to deal with China?

Well, these are just some of the questions I'm going to put to Michael Froman, a former US trade representative,

who's currently the president of the Council on Foreign Relations; and I'm meeting him at his headquarters, right in New York.

Ambassador Froman, welcome to the program.

- Great to have you with us.
- Thanks for having me.

So, how would you evaluate the outcome of the US-China summit that recently took place?

Was it in line with your expectations?

It was. I think, first of all, the summit itself was in many respects the most important deliverable.

In that, the goal was to get the two leaders together after a tumultuous year,

to draw a line under the relationship, and to put it on a path towards some stable relationship heading into 2024,

which between the Taiwan election in January, and the US election in November, could be a bumper year in US-China relations.

And I think it achieved that; and it achieved more than that.

It achieved some important deliverables around, for example, cooperation on fentanyl,

around military-to-military communications, some work on climate change...

not groundbreaking, not fundamentally gonna resolve the major issues in the relationship,

but just showing that the two countries could get together and work together on common interests.

So, what do you think are the biggest challenges?

I mean, in terms of why is this relationship so tense right now?

Well, I think on one hand, it's somewhat structural:

we're the two largest economies in the world, we're going to be competitive in certain respects.

I think the question is; and because China is not just an economic competitor, but is a major military power,

who's been investing a lot in its militarization and its nuclear weapons capability,

it's been exerting itself in the South China Sea, in the Taiwan Straits,

it's been creating bases in other places around the world.

So, it has aspirations to be a multi-dimensional global power, and that is inherently a cause of tension with the United States.

US does not wanna keep China down.

It's not about making China not succeed when it comes to its economic development.

It's in our interest that China economically develop, that China grow.

Because over the last several decades, China has been responsible for up to a third of world growth.

We benefit from that, our exports benefit from that, our allies' exports benefit from that.

And so, that's... that's important.

But it's also important that as they grow, they do so on a level playing field, following the rules...

And that's where the tension has come, because outside of China, the view has been that China hasn't always played by the rules,

and that's had adverse consequences on US businesses and businesses from other countries as well.

The view from China is different; I mean, in the summit,

President Xi expressed very clearly his dissatisfaction with the export controls, that the Biden administration has in place.

He said the move is containing China's development.

What do you think about the Biden administration's decision on having the semiconductor export controls?

Is that... are they appropriate? I mean, do they work as intended?

Well, I think the goal, first of all, is that these semiconductor chips, the advanced chips,

can help a country advance significantly, particularly on artificial intelligence, which can have implications for national security.

And as now a global rival of sorts, we're... I think properly,

the US is properly concerned about helping, enabling China to be a stronger military power around the world.

That's not in our interests; it's not in the US interests to see further tension in the military dimension.

I think the question is whether the export controls, which start by saying we want a small yard and a high fence;

meaning we're gonna contain, or we're gonna restrict the export of a very small number of technologies,

that could be used potentially for military purposes.

Whether that begins to expand, and become, not just about national security, but about broader competitiveness, ultimately about protectionism.

And I think that's what the Biden administration has been trying to do, is to convey to China that while this is a work in progress,

there the intention is to keep it narrowly-focused on the most important technologies.

Right. But then what about tariffs?

Because the Biden administration is allowing the tariffs to stay in place, that were introduced during the Trump administration.

Do you agree with that policy decision? What do you think of that?

Well, I think the tariffs... countries work around tariffs, ultimately.

Companies move to other locations, or they reprice, or they look at their products.

Ultimately, tariffs are paid by the consumer.

And so, on one hand, we in the United States don't like our dependance on China as a manufacturing hub.

On the other hand, we don't like inflation, and we don't like a higher cost of living.

And the tariffs are intended to deal with the first problem, but they exacerbate the second problem.

And I think making those trade-offs explicit and just making a decision: are we willing to pay more for non-strategic goods,

for the sake of moving manufacturing out of China and having a more diversified supply chain?

I think there's a stronger case for removing the tariffs.

And, I'm very sympathetic... as a former trade negotiator, I'm sympathetic to the argument that tariffs give you leverage in a negotiation.

But that means you need to use that leverage.

You need to be able to go to the table and say: if China does the following three things, we will lift tariffs in the following three areas.

And so far, the administration and China have not entered into that kind of dialogue,

where we would be talking about what the trade-off might be.

One of the other things that President Xi talked about at the summit,

was he asked for more private investment from US businesses to come to China.

Do you think US companies are going to pay heed, and that they are going to, you know, return to China and invest in China in the near future?

Well, China is clearly still a very important market for a lot of businesses.

I think what we're seeing... there're a couple of cross-cutting dynamics here.

On one hand, particularly when it comes to manufacturing, I think companies are looking at diversifying their supply chains.

It's not that they're closing down and moving out of China, but when the incremental investment comes up for discussion,

it's now being discussed: should we put it in Vietnam, or Malaysia, or Mexico, or Eastern Europe, as opposed to China.

And that's just... frankly, diversification is good risk management.

I think on the foreign investment side, the Chinese government has been, on one hand, the last eight months or so,

they've clearly been on a charm offensive, sending the message out that they're open for business;

that they want American and other non-Chinese companies to come to China, and to invest further;

that they need it for their economic growth and development.

On the other hand, they have implemented their anti-espionage law, their data law,

in such a way that is putting a chilling effect on foreign investment;

with foreign executives being detained, with offices being raided,

and it being quite uncertain how these laws are going to be implemented and enforced.

One thing I think we've been trying to encourage the Chinese to do is to clarify: how are these laws to be implemented and enforced?

And then foreign businesses can make their own decision about how important the China market is, what risks they're willing to take.

But right now, there's a lot of uncertainty.

And while that uncertainty is in the air, CEOs may go back and forth to China for conferences,

but in terms of major allocations of capital, I think you're seeing that... that'll really be quite chilled.

Do you think that China will kind of heed to these concerns, and provide the so-called clarity, that you're talking about, or stability?

I think that the jury is still out.

President Xi met with a number of businesspeople when he was in California.

I think that message was clearly sent.

And I think the business community has asked for clarification.

But I think it's also a very difficult and sometimes opaque system in China.

And I think it's unclear yet how committed they are to clarifying it.

Given the fact that the US and China are facing challenges over security,

such as, of course, you've got the South China Sea and the issue of Taiwan...

What kind of strategy would you recommend for US-China when it comes to trade and economy?

I think between US and China, normalizing the relationship, stabilizing it, is a positive step forward.

Because if you're sitting in a boardroom, or sitting in an executive suite, and you're deciding whether to allocate capital,

if there's a lot of uncertainty hanging over China and the US-China relationship,

it's just likely to deter you from wanting to do that.

You're gonna look somewhere else in the world.

And so, to the degree that we can stabilize the relationship, I think that's a positive overall for the potential there.

And this is not about having... just having meetings.

We've had decades of long meetings, involving hundreds of officials on both sides, not always producing a great deal of progress.

So, meetings are a necessary, but an insufficient condition.

And we then really have to come up with concrete ways to address the outstanding issues.

That's why I think the summit was a very positive step; now that needs to be followed up, and needs to be built upon.

So where do you see relations headed?

Well, I think there's 2024, which we need to just get through.

And because we can see this being a very volatile year.

Things could go quite smoothly, or they could be quite choppy.

And I think both countries have an interest in the world, as an interest in managing it with as much stability and certainty as possible.

But I think, ultimately, redefining what is the new equilibrium with China, that we're seeking to achieve.

You know, we had a Cold War with the Soviet Union; it lasted 40 years.

We had a post-Cold War period, which was sort of a unipolar, US-Western-Liberal-Washington consensus moment,

that lasted 30 years; that's over.

We don't know what this new period is, or how it's likely to be defined, particularly vis-à-vis China.

Is it something like a Cold War? Is it something like détente, or peaceful coexistence?

Is there some new notion, that doesn't come from the US-Soviet experience, given the more complex nature of our interconnectedness?

I think that's what remains to be seen.

And we don't yet have in our mind's eye what is it that we want the new relationship to look like...

And there're areas where we're going to compete.

And we should just compete on a level playing field, and the Biden Administration has laid out that framework.

The problem was, until recently, China didn't buy into it.

And their view was: well, as long as you're trying to compete with us,

you're trying to deny us technology, that we want to be able to compete more effectively with you, then we are reluctant to cooperate;

or we're reluctant to take steps to mitigate a potential military confrontation.

I'm hopeful that this summit was a breakthrough in that regard, in that, at least from a framework perspective,

China has agreed that there are areas of cooperation that we need to pursue,

even as we continue to work through the competitive aspects of our relationship.

How optimistic do you feel about the future of the relationship with China?

I, ah... look, I'm an optimistic person, so I am cautiously optimistic.

But I think we in the United States need to do our homework.

We need to invest domestically to ensure that we are competitive,

that we're addressing our own domestic issues to enhance our productivity and our competitiveness,

that we're dealing with some of the military, strategic, and political issues in the region.

And I think that China needs to come to terms with whether the path they're on is likely to be a successful one for them or not.

China has benefited enormously over the last few decades from having a benign international environment,

that allowed them to attract investment and export to the rest of the world.

And I remember sitting with my Chinese counterparts during the Obama administration,

and frankly warning them that if we did not make progress on these outstanding issues,

support for that benign international environment would dissipate.

And that's exactly what happened: the business community became disenchanted with China.

There was a populist reaction to the competition with China,

and the impact that China competition was having on manufacturing and communities in the United States.

And as a result, the pendulum shifted, in a way that is now,

we have a bipartisan consensus in the United States, about being really tough with China.

And I think, frankly, China's brought this on themselves, because they failed to address the outstanding issues in the relationship.

They've failed to commit to competing on a level playing field and following the rules-based order,

at a time when it was clear that this was going to happen.

Ambassador Froman, some great insights from you.

- Thank you so much for joining us on the program.
- Thanks for having me.

A positive or negative trade relationship between the US and China has global implications,

but perhaps none are more acutely affected than countries in the Indo-Pacific.

Join us next time as we continue our conversation with Ambassador Froman,

and take a deeper look at the current US trade policy on Asia and its implications for the region.

I'm Del Irani, thanks for your company. I'll see you next time!